The stringency of future capital requirements that UBS will need to meet is not only a crucial matter for the bank's management and shareholders, but also impacts credit rating analysts responsible for evaluating the bank's credit quality and the reliability of its bonds.

The credit research team at Zürcher Kantonalbank (ZKB) is probably even closer to the expected adjustments to Swiss regulation in this respect than the experts at the international rating agencies (Standard & Poor's, Moody's and Fitch). Like UBS, ZKB is one of the systemically important banks in Switzerland and operates as a universal bank, offering the full range of services.

How Strict Will the Capital Requirements Be? 

ZKB's credit rating review is prompted by the big bank's quarterly reslts. «The question of capital requirements hangs over everything,» reads the headline of ZKB analyst Akkio Mettler's analysis. He notes that UBS has exceeded profit expectations due to strong earnings and advances in realizing savings potential following the Credit Suisse (CS) takeover, along with steady progress in the integration process.

Nevertheless, the integration risks remain high. At 14.3 percent, the Common Equity Tier 1 (CET1) ratio was also below expectations. Mettler attributes the decline to the accelerated amortisation of valuation losses on financial assets (mainly mortgages). The reported figure now provides a more accurate reflection of the current situation.

Sticking to Distribution Targets Despite Uncertainities

Mettler also noted that the bank is sticking to its distribution targets, «even though these are heavily dependent on the future capital requirements yet to be determined and are therefore subject to uncertainty that is likely to persist for some time». In particular, the capital requirement for UBS Americas Holding represents a factor of uncertainty.

As a result, ZKB has confirmed its previous rating of BBB+ with a stable outlook for UBS Group. This is slightly lower than the international agencies, which rate the big bank in the single A range (A-, A3, A).

«We Are a Little More Critical»

«We are a little more critical because the distribution of capital within the Group following the takeover of CS has not yet been finalised and the migration still harbours risks,» Mettler told finews.ch. «But if you look at the key figures alone, a rating in the single A range is justifiable.»

ZKB downgraded UBS Group from A- to BBB+ in the course of the CS transaction in spring 2023. ZKB itself is a triple-A borrower because its rating depends on the creditworthiness of the Canton of Zurich due to the state guarantee.